Stock Liquidity Measured by Relative Bid–Ask Spread and Its Role in Explaining Financial Leverage Under Financial Constraints
محورهای موضوعی : Financial Mathematics
Maryam Sadat Tabatabaeian
1
,
Mohammad Amini
2
,
Abdolrasoul Rahmanian Koushkaki
3
1 - Department of Accounting, Faculty of Accounting & Management, Payame Noor University, Tehran, Iran.
2 - Department of Accounting, Faculty of Accounting & Management, Payame Noor University, Tehran, Iran.
3 - Department of Accounting, Faculty of Accounting & Management, Payame Noor University, Tehran, Iran.
کلید واژه: Stock Liquidity, Financial Leverage, Financial Constraints, Relative Bid-Ask Spread , Capital Structure,
چکیده مقاله :
In emerging markets, firms often face severe financial constraints and information asymmetry, limiting their access to external financing and increasing reliance on debt. Stock liquidity can mitigate these frictions by reducing transaction costs and enhancing market transparency. This study examines the effect of stock liquidity measured by the relative bid–ask spread on financial leverage, and the moderating role of financial constraints among firms listed on the Tehran Stock Exchange during 2014–2023. Using panel data from 1,500 firm-year observations and fixed effects regression models, the results reveal a significant negative relationship between stock liquidity and leverage. Moreover, financial constraints strengthen this negative link, indicating that constrained firms are more sensitive to liquidity conditions when making capital structure decisions. These findings align with theories of asymmetric information and investment constraints, suggesting that higher liquidity enables firms to rely more on internal financing and less on external debt. The study contributes to capital structure literature in emerging markets by emphasizing the interaction between liquidity and financing frictions. Practically, the results provide insights for managers, policymakers, and investors: enhancing transparency and monitoring financial constraint levels can improve market efficiency and guide firms in optimizing their financing strategies
In emerging markets, firms often face severe financial constraints and information asymmetry, limiting their access to external financing and increasing reliance on debt. Stock liquidity can mitigate these frictions by reducing transaction costs and enhancing market transparency. This study examines the effect of stock liquidity measured by the relative bid–ask spread on financial leverage, and the moderating role of financial constraints among firms listed on the Tehran Stock Exchange during 2014–2023. Using panel data from 1,500 firm-year observations and fixed effects regression models, the results reveal a significant negative relationship between stock liquidity and leverage. Moreover, financial constraints strengthen this negative link, indicating that constrained firms are more sensitive to liquidity conditions when making capital structure decisions. These findings align with theories of asymmetric information and investment constraints, suggesting that higher liquidity enables firms to rely more on internal financing and less on external debt. The study contributes to capital structure literature in emerging markets by emphasizing the interaction between liquidity and financing frictions. Practically, the results provide insights for managers, policymakers, and investors: enhancing transparency and monitoring financial constraint levels can improve market efficiency and guide firms in optimizing their financing strategies
[1] Almeida, H., Campello M., Weisbach MS., The cash flow sensitivity of cash, J Finance, 2004; 59(4):1777–804. Doi:10.2139/ssrn.345840
[2] Amihud, Y., Illiquidity and stock returns: cross-section and time-series effects, J Financ Mark, 2002; 5(1):31–56.
[3] Armanious, A., Zhao, Z., Stock liquidity effect on leverage: The role of debt security, financial con-straint, and risk around the global financial crisis and Covid-19 pandemic, Int Rev Financ Anal, 2024; 12:1–18. Doi: 10.1016/j.irfa.2024.103093
[4] Dang, TL., Ly Ho, H., Dzung Lam, C., Thao Tran, T., Vo, XV., Stock liquidity and capital structure: International evidence, Cogent Economics & Finance, 2019 Jan 1; 7(1):1587804. Doi:10.1080/23322039.2019.1587804
[5] El-Sayed Ebaid, I., The impact of capital-structure choice on firm performance: Empirical evidence from Egypt, The Journal of Risk Finance, 2009; 10(5):477–487. Doi:10.1108/15265940911001385
[6] Frank, MZ., Goyal, VK., Capital structure decisions: which factors are reliably important? Financial management. 2009 Mar; 38(1):1-37. Doi:10.2139/ssrn.567650
[7] Gholami, S., Sheikhi, M., Alipour, S., Investigating the effect of debt maturity on the relationship be-tween financial leverage and financial constraints in Tehran Stock Exchange, In: 1stIntConf Advances in Management, Economics, and Accounting Sciences; 2021; Sari, Iran. (in Persian)
[8] Goodarzi, A., Tehrani, R., The effect of corporate acquisitions on financial constraints of target firms, Account Knowl J, 2016; 7(27):83–108. (in Persian). Doi:10.22103/jak.2017.1561
[9] Hussain, A., Akbar, M., Khan, MK., Sokolová, M., Akbar, A., The interplay of leverage, financing con-straints and real earnings management: A panel data approach, Risks, 2022; 10(6):20. Doi:10.3390/risks10060110
[10] Kaplan, SN., Zingales, L., Do investment-cash flow sensitivities provide useful measures of financing constraints? Q J Econ. 1997; 112(1):169–215. Doi:10.1162/003355397555109
[11] Karimi, F., Akhlaghi, H., RezaeiMehr, F., The impact of financial leverage and firm growth on invest-ment decisions in Tehran Stock Exchange, Financ Account J, 2020; 2(1):10–27. (in Persian)
[12] Lipson, ML., Mortal, S., Liquidity and capital structure, J Financ Mark, 2009; 12(4):611–644. Doi: 10.1016/j.finmar.2009.04.002
[13] Jensen, MC., Meckling, WH., Theory of the firm: Managerial behavior, agency costs and ownership structure, InCorporate governance, 2019 ;77-132. Doi:10.1016/0304-405X(76)90026-X
[14] Modigliani, F., Miller, MH., The cost of capital, corporation finance and the theory of investment, The American economic review, 1958 ; 48(3):261-97.
[15] Moshaikh, S., Ahmadi Amin, A., The effect of liquidity and investment opportunities on investment decisions with the moderating role of financial constraints. Account Knowl J, 2022; 13(48):83–96. (in Persian). Doi:10.22103/jak.2022.16969.3410
[16] Myers, SC., Capital structure, Journal of Economic perspectives, 2001 May 1; 15(2):81-102. Doi:10.1257/jep.15.2.81
[17] Myers, SC., Majluf, NS., Corporate financing and investment decisions when firms have information investors do not have, J Financ Econ. 1984; 13(2):187–221. Doi:10.1016/0304-405X(84)90023-0
[18] Naseri, HR. R., Fakhrhosseini S., Stock Liquidity and Excess Financial Leverage: The Role of Agency Costs in Tehran Stock Exchange Companies. Strategic Studies in Financial and Banking, 2025 Apr 26; 3(1):1-2. (in Persian)
[19] Peymannia, F., Hajiha, Z., The effect of stock liquidity on cash holdings with emphasis on growth opportunity in listed companies on Tehran Stock Exchange, Account Corp Gov Res Q, 2024; 3(7):81–92. (in Persian)
[20] Rajan, RG., Zingales, L., What do we know about capital structure? Some evidence from international data, The journal of Finance, 1995 Dec; 50(5):1421-60.
[21] Rezaei, H., The effect of financial constraints and stock liquidity on investment opportunities, New Res Approaches Manag Account, 2023; 7(88):877–88. (in Persian)
[22] Ryan, H., The use of financial ratios as measures of determinants of risk in the determination of the bid-ask spread, J FinancStrategDecis. 1996; 9(1):33–40.
[23] Shamsi, A., Rahmani, A., Sobhani, M., Stock liquidity and capital structure: The moderating role of financial constraint, Advances in Mathematical Finance and Applications, 2021; 6(2):101–122. (in Per-sian). Doi:10.22034/amfa.2021.1902323.1401
[24] Singh, P., Gahlot, R., Yadav, MP., Singh R. Is financial leverage influenced by the financial perfor-mance and firm characteristics in the FMCG sector in India? Asia Pac Financ Mark, 2025; 1–22. Doi:10.1007/s10690-025-09516-8
[25] Tabatabaeian, MS., Amini, M., Investigating the Relationship between Stock Liquidity Based on Ami-hud Criterion and Financial Leverage with Emphasis on the Role of Financial Constraints in Companies Listed on the Tehran Stock Exchange, Research in Accounting and Economic Sciences, 2025 Spring; 9(1):1-18. (in Persian)
[26] Whited, TM., Wu, G., Financial constraints risk, The review of financial studies, 2006 Jul 1; 19(2):531-59. Doi:10.1093/rfs/hhj012
[27] Zhou, Y., Lok, C-L., Capital structure and financial distress risk: Evidence from China, Int J Acad Res Account FinancManag Sci, 2024; 14(4):603–616. Doi:10.6007/IJARAFMS/v14-i4/23147
